5 Tips to tighten up your business finances

The top two challenges faced by South African SMEs, according to the latest Business Partners SME Index, are cash flow and economic conditions – and this has remained unchanged in the Index for several years. Getting your financial house in order by preparing a financial road map for your business, with consideration of risk and risk mitigation is, therefore, critical.

This is according to Philippa Wild, Head of Broker Solutions Underwriting at South Africa’s largest insurer, Santam. “It’s critical to regularly revisit one’s financial priorities and consider your ability to withstand unexpected shocks that could derail your efforts, possibly in partnership with a trusted financial adviser, in order to set your business up to thrive.”

Wild points out that although the IMF forecasted recently that South Africa’s economic growth would not weaken as much as previously predicted, SME owners should still take caution and plan prudently. “We’re not out of the woods by any means economically speaking. The SARB has kept its GDP forecast unchanged at 1.0% and 1.1% for 2024 and 2025, respectively.”

Wild shares five tips to tighten up business finances and their ability to handle unforeseen shocks,  in a tricky environment:

1.  It all starts with a plan: A holistic financial plan should include a budget, accounting, tax planning, risk management (including risk mitigation strategies, insurance and an emergency fund), and some forecasting for the future. Research says that 50% of small businesses fail within the first 5 years, primarily due to insufficient upfront and ongoing financial planning. Consult an intermediary if you feel like you need help coming up with a practical, step-by-step plan for the next 6-12 months. The last 12 months have shown that circumstances can change fast. Insurance should be a pivotal part of a financial plan as proactive risk management is essential.
2. Wax your tax: SARS recently announced that it would be clamping down on business transactions in an effort to make up much needed revenue. So make extra sure your records and bookkeeping are tight to avoid unnecessary hassle later. Consider ways to maximise your tax deductions to lower your tax burden. Again, consult an intermediary for the best ways to do this.
3. Win with cash flow: Cash flow is an ongoing issue for most small business owners. It’s an ongoing exercise of getting a handle on business direct and indirect expenses and overhead costs. Chart your cash inflows and outflows so you can understand what’s happening. For example, could you negotiate better rates with your suppliers? Could you invoice earlier? Where can you cut costs? How can you improve your payroll processes to keep cash flow continuity – and happy employees? When considering your insurance purchase, choose an insurer who puts you back in the same position quickly, to ensure that you are able to continue your operations, when bad things happen. Speak to your financial advisor to help you with this consideration.
4. Ditch the debt: Many businesses rely on some kind of debt. But, with higher interest rates, Debtsource has reported an aggregate 25% debtor delinquency rate increase year-on-year - as the number of companies struggling to pay back debt increases. Try to manage this by ensuring that the cost of the capital you borrow is lower than the expected returns. Consider paying off the smallest debts first to free up funds to pay off the next smallest debt and so on, to create a virtuous cycle of ditching the debt.
5. Keep it separate: It’s supposed to be rule number one, but in practice, few people manage to get it right. Try to keep your personal and professional finances and insurance purchases apart, with separate cards and accounts for each. This enables you to track your business’ goal progression and performance far better.

While these tips are far-reaching, Wild concludes that every business is unique and requires a custom plan. “With SMEs being such an integral part of the success of our economy, it’s imperative to consult a professional for a holistic roadmap to set your business up for success and to help it survive and even thrive when the unforeseen happens by having the appropriate risk management strategies, including insurance purchases, in place,” says Wild.